The Evolution of Modern Finance

Evolution of Modern Finance

Editor’s Note
Dr. Mahuya Basu teaches Finance at Globsyn Business School – one of the best business management colleges in Kolkata. With over 22 years of experience in teaching and academic administration, Dr. Basu’s last stint, in the capacity of a faculty and Head of the Department was at Footwear Design & Development Institute (FDDI), Kolkata. She was earlier associated as a faculty member in ICFAI National College and led several learning sessions for students in the field of Financial management, Economics and Business Research Methods, etc. Dr. Basu has several conference papers and journal publications to her credit, and has co-authored two books. One of her research papers has been awarded as the Third Best Paper from industry and academia in the International Conference of Nirma University; NICOM.

Unlike many fields, ‘Finance’ as a stream of academic study emerged long after its practice began in human civilization. The roots of corporate finance can be stressed back in ancient civilizations of Mesopotamia and ancient Rome, where merchants and traders engaged in financial transactions, employing rudimentary forms of financial management. The joint-stock companies emerged as a form of business in 17th century Europe which laid the groundwork for formalized corporate structures. Compared to its age-old existence, the study of Finance literature started only in the 1950s, more specifically in 1958 with the ground breaking work of Modigliani and Miller.

Similarly, first commodity derivatives including commodity options trading began in Chicago at the Chicago Board of Trade in 1849, whereas the first formalized option pricing model was only introduced in 1973 with the Black-Scholes Option Pricing Model, and the regulatory framework for the same is still not fully developed. Hence, finance is a field where literature often followed practices and theories were often formalized long after the practices were established.

Over the last sixty years, finance witnessed its most spectacular development in diverse fields both in terms of theory and practices. The period following World War II laid the groundwork for the modern financial system. The Bretton Woods Agreement in 1944 established a framework for a stable international monetary system, introducing institutions like the International Monetary Fund (IMF) and the World Bank. The 1960s and 1970s also witnessed the rise of capital markets across the globe.  Stock markets experienced significant growth, with innovations such as the development of mutual funds and the securitization of mortgages expanded investment opportunities and diversified the financial landscape.

The late 20th century marked its way with financial innovation and deregulation leading to the introduction of innovative financial instruments like financial derivatives and Euro dollar bonds. At the same time, the 1980s and 1990s marked the era of “Big Bang” reforms, breaking down traditional barriers between banking, securities, and insurance activities, leading to the creation of universal banks. Early 21st century brought about a technological revolution that revolutionized financial markets, which started with electronic trading platforms and extended to the rise of fintech. The emergence of Blockchain Technology, Cryptocurrencies, and Digital Payment systems has introduced new possibilities and challenges to traditional finance. Along with the growth of institutions and innovative products, the financial service sector has emerged as one of the largest and fastest growing sectors in the global economy. In 2023, all publicly traded companies globally reported a total of 5.3 trillion dollars of net income, almost one third of which came from financial service sectors like banks, insurance companies and investment bankers.

With the spectacular growth of industry, the related literature grew rapidly too. Few pivotal starting points were often identified with the emergence of the Modern Portfolio Theory (MPT), Efficient Market Hypothesis (EMH), and Capital Asset Pricing Model (CAPM). Another celebrated theory of finance emerged from the theory of no-arbitrage pricing used in valuing financial derivatives by Ficher Black & Myron Scholes in 1973. But alternative theories grew as fast as its traditional forms with behavioral and environmental finance. In recent years, there has been a growing recognition of the importance of environmental, social, and governance (ESG) factors in financial decision-making leading to the emergence of products like ESG funds and Green bonds.

The vast realm of financial literature and practices, with its rapidly advancing branches, constitutes an intriguing area of exploration. At Globsyn Business School, these dynamic branches, encompassing both literature and practices, receive proper acknowledgment through a diverse range of specialized and optional courses. Students at the B-School are consistently urged to engage in projects and dissertations addressing pertinent and emerging issues in the field of finance. In essence, Globsyn Business School serves as a fertile ground where the seeds of financial education are planted, nurtured, and allowed to flourish.

 

 

Dr. Mahuya Basu
Faculty – Marketing
Globsyn Business School